The unbundling of commercial banks

In a post on the state of consumer fintech, I took a look at how retail banks are beginning to “unbundle” as tech tries to reinvent finance. I now look at how the same is beginning to happen for commercial banks.

Like it did for retail banking, I think technology is impacting commercial banking in three main ways:

1. Increasing access to information thereby allowing businesses (businesses here refers broadly to small, medium and large businesses which would be the clients of commercial banks) to make better decisions
2. Reducing the friction/offering better experiences for businesses in conducting common activities
3. Lowering the fees on transactions for businesses by serving as a cheaper middle man

To show how the above unbundling is beginning to happen, I’m going to start with the key activities performed by a commercial bank to see how startups have emerged to serve as a better platform or help perform them more efficiently:

1. Checking and account management services
2. Loans and financing
3. Merchant services

The unbundling of commercial banking

Checking and Account Management Services

This refers to activities involved in basic day to day operations such as operating a checking account along with other non-core activities banks tend to provide businesses such as paying bills to other internal operations managing cash-flow and payroll, managing accounting and benefits. Most small businesses still use banks to maintain a commercial checking account, but there are a number of startups that either work with banks or enable businesses to conduct their internal operations in a smoother manner.

Products that help with transfers, bill payments, accounting and budgeting include:

• Standard Treasury which makes it easier for businesses to deal with their banks through standard APIs that ease transfers and other transactions
• Dwolla FiSync which enables financial institutions to offer real-time payments.
• Yodlee which provides tools to allow banks to offer more interactive and innovative experiences for businesses and allows for businesses to manage all their accounts in one place through their Small Business product
• Currency Cloud which works with financial institutions to improve their cross border payment offering through an API
• Xero which provides an online accounting software for small and medium businesses
• Quickbooks which is an accounting software for small businesses that is integrated with many banks
• Bill.com which enables businesses to receive, route and pay invoices electronically

In terms of activities such as payroll, benefits, insurance and other services, some products that help include:

• Zenefits which enables businesses to manage their entire HR — payroll, compliance and benefits from one place
• ZenPayroll which is a comprehensive payroll service that enables businesses to set up and and run payroll from any device
• Insureon which is an online insurance agent for small businesses
• Indinero which is an accounting, taxes and payroll solution for businesses
• Justworks which helps businesses handle their benefits and payroll.

Loans and Financing

The small business and commercial loans market is probably the one being disrupted the quickest by technology, with a number of startups emerging to compete with banks in this space, relying on different information to underwrite loans than banks have traditionally used. To better understand this market, I’ve broken it up based on roughly the length of the financing of the startups aim to provide, into three main types:

• Short term credit (supply chain/working capital)
• Loans (generally longer term)
• Funding (investments into businesses)

Short-term credit

Small businesses (and large ones too) often face short term cashflow problems. Increasingly, startups are emerging that help these small businesses either by providing supply-chain financing or merchant cash advances at lower rates than banks or helping them more effectively manage their supply chain reducing the need for financing.

Some of the companies include:

• Receivables Exchange which is a real-time online marketplace for working capital financing for small and large businesses
• PrimeRevenue which provides cash flow to more than 13,000 buyers and suppliers through its OpenSCi platform
• Obillex which is a supplier finance technology platform that enables the public sector and large corporations to rapidly settle the invoices of their suppliers, including SMEs.
• Taulia which enables businesses to get paid earlier by offering dynamic discounts to large corporations they supply to thereby easing their cash flow problems
• Tradeshift which helps companies improve processes like invoicing, workflow and supplier financing using cloud-based technology

Loans

On the loans front, startups are of two types (1) those that help companies find the best loan terms (marketplaces) and (2) companies that either directly or indirectly give loans to businesses using data and by connecting businesses to those with funds (alternative lenders)

Some examples of the first type include:

• Fundera is an online marketplace that connects small businesses with funding providers
• Creditera which helps businesses build and monitor credit and find the best loan terms Some examples of the second type include:
• OnDeck which leverages electronic information including online banking and merchant processing data to identify the creditworthiness of small businesses in minutes
• Funding Circle which is an online marketplace which allows savers to lend money directly to small and medium sized businesses
• Square Capital which uses a businesses transaction history on Square to offer funds with payments tied to sales volume
• Kabbage which leverages data generated through business activity such as accounting data, social media, shipping data, and other sources to understand performance and deliver financing options for small businesses instantly.
• Biz2Credit which is a marketplace peer-to-peer lending platform
• Lendio is a platform that helps small business owners find lenders and secure loans

Funding

These refer to the platforms (including crowdfunding) which connect people looking to back businesses with businesses looking to raise money. This isn’t a service that too many banks directly offered, but by making it easier for companies to raise money from investors/customers, these platforms have reduced some of the need for loans.

Some of the products are:

• AngelList which is a funding platform for seed and early stage venture investments
• Equitynet which is a business crowdfunding platform which helps businesses raise equity, debt and royalty-based capital
• Crowdfunder which is an online fundraising platform to democratize access to capital
• Gust which connects investors with startups around the world
• Kickstarter which is a crowdfunding platform for creative projects that has allowed companies to pre-sell to customers thus reducing the need for loans to start businesses, instead using customer funding to product products.

Merchant Services

This refers to the category of services that help businesses accept payments and related activities. The category is fairly broad and includes things like point of sale systems, online transaction processing systems and loyalty programs. Startups have increased innovation in this space by enabling businesses to accept online and on mobile easily and cheaply and with less risk.

Some of the main players in the space are:

• Square which allows businesses to accept payments through its POS system Register or its card reader.
• Stripe is a company that provides a suite of APIs that enable businesses to accept payments over the Internet
• Braintree which enables businesses to accept payments online and on mobile devices
• Dwolla which enables businesses to accept payments digitally
• Paypal which offers solutions for businesses to accept payments online or at stores
• Bitpay which is a payment processor which makes it easier for businesses to accept bitcoin as form of payment
• Coinbase which allows business to accept bitcoin through a mobile device
• Klarna which offers a mobile checkout solution for retailers to improve mobile conversions
• SumUp which allows merchants to accept credit and debit cards, using their smartphones or tablets, in a simple, secure and cost-effective way
• GoCardless which is a UK-based service that helps businesses establish automatic bill payments, direct debits, and recurring payments online
• MiiCard which provides Online Identity Services which enable businesses to conduct high-value transactions to take place in a purely digital and secure environment
• Trustev which helps business reduce fraud when taking payments online
• SiftScience which offers fraud prevention technology for businesses
• LevelUp which allows businesses to accept mobile payments and offer loyalty programs

Closing Thoughts

Overall startups tend to be disrupting the commercial banking industry by focusing on specific activities associated with a bank and trying to perform them better.

Some of the key themes that emerge about the manner startups are trying to disrupt commercial banks in are:

1. Increasing access to information thereby allowing businesses to make better decisions (Creditera, Fundera, Indinero, Siftscience)
2. Reducing the friction businesses face in conducting activities where friction can be time or effort (Stripe, Standard Treasury) or offering a more superior experience (Square, LevelUp)
3. Lowering the fees/rates businesses have to pay by serving as a cheaper middle man made possible by the use of data (OnDeck, Square Capital) or peer to peer marketplaces (Funding Circle, AngelList)

Thanks for reading! Feel free to share this post and leave a note if I’ve missed a product you think should be in here, but please note I’ve tried to use examples to be illustrative rather than exhaustive.

I’m tanayj on twitter if you want to discuss further!

A huge thanks to Ishaan Malhi, Bruno Werneck and Miles Grimshaw for reading drafts of this piece.